“The sector has fallen into a trap we created. By focusing on what we DON’T spend, and not on what has been accomplished, we have completely missed the mark in our messaging. We are part of this problem and it’s up to us to educate our way out of it,” asserted Paulette Maehara, former president of Fundraising Professionals in Dan Pallotta’s groundbreaking book Charity Case (Jossey-Bass 2012).

I recently re-watched Dan Pallotta’s highly popular TED Talk about Charity Case and was energized by such a credible and well-researched argument about the commonly misinterpreted topic of administrative costs and overhead. Unfortunately, we’re working against a flawed philosophy reinforced for decades by donors and nonprofit executives alike. Consequently, this week’s post is a message to nonprofit donors and contains some of Pallotta’s main points worth repeating.

Stop asking the flawed question and get to the heart of what really matters

Donors have to stop asking the question, “What percentage of my donation goes to the cause versus the overhead?” Pallotta argues this question is flawed in several ways:

1) The question makes us think overhead is not part of the cause but it absolutely is.

2) It also promotes the notion that overhead steals from the cause, forcing charities to obsess over keeping short-term overhead low at the expense of long-term solutions.

3) This question ironically gives the donor really bad information. It tells nothing of the charity’s quality of work, shares nothing about how it defines the cause, leads donors to discriminate unknowingly, gives the wrong overhead figure because it’s measuring against the wrong result.

Help your charities advertise, take risks and give reasonable time to build sustainability

Pallotta further argues nonprofits have to operate under a separate and discriminatory rule book from businesses. For example, in the area of advertising and marketing, charities can’t build demand for donations to their causes while businesses advertise until the last dollar no longer produces a penny of value.

On the topic of risk taking in pursuit of new donors, while it’s okay if the movie industry spends $100 million on flops, a $5 million charity walk that doesn’t show a 75 percent profit in the first year is considered suspect. Consequently, nonprofits shy away from large-scale fundraising ideas and cannot benefit from powerful learning curves.

Yet another example relates to time horizon. New companies can go six years without returning any profits to investors in the interest of building market dominance while charities that have long-term goals are expected to yield short-term, direct services. If they don’t deliver, they are pariahs. You can help dismantle some of these rules by leveraging your dollars on projects that raise much-needed awareness, allow for calculated risk and long-term growth toward meaningful goals.

Nonprofits are starving financially

You can help by asking new questions like “What kind of impact are you able to accomplish with your cause?” or “What meaningful progress are you making toward systemic change?” Help charities break the starvation cycle of what feels like mandatory low or no overhead. Leverage your donor investments in new ways to get the community looking at the cause differently or to accommodate long-term systemic change.

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This week, Alice Korngold, author of Leveraging Good Will, weighs in on the important topic of listening. Her remarks inspired me to share fellow authors who agree with her about this essential leadership skill. Seven Page to Practice™ book summary excerpts that highlight good listening follow Alice’s remarks.

I read CausePlanet’s book reviews and articles on a regular basis for their wisdom and to follow the conversation. In preparing to write this post, I perused many recent pieces for inspiration. Brilliant stuff…. if perhaps a bit head-spinning for most nonprofit CEOs when taken in large doses. Fundraise this way, establish your culture that way, create a sustainable business model this way, connect with social media that way. And change sure is hard, but here’s how to do it (from my personal favorites – the Heath brothers). Woah!

My bookshelf is stocked (now my iPad) with many such books and there is often much to gain from them. At the same time, I believe that the best leaders learn the most from listening to the people with whom they work. Unless the CEO walks the floors, encourages people to truly say what they think, and has an open ear, no advice from any book will help. This is surely the case with CEOs of NGOs and nonprofits who are the primary readers of this site.

And listening doesn’t mean much unless your organization is successfully engaging and retaining people from a variety of generations, backgrounds and perspectives. While it might seem messy and at times inconvenient to have a blend of personalities – even more so when they are ardent advocates of the cause – the magic and energy of the organization is in that very passion and diversity. Without that, a nonprofit environment would be sterile; it would lose its heart and soul. It would also miss the variety of stories and sharing of experiences from the people at the organization who make the world a better place.

Yes, by all means, NGOs and nonprofits need to envision and embrace many changes and indeed many do. These changes include more business-like approaches in establishing new revenue models, capturing and fully engaging young new talent, creating and then leveraging the power of great websites and social media, and doing many of the things that the experts advise on CausePlanet.org’s valuable pages.

The best leaders learn how to listen to the different perspectives, appreciate and engage everyone who brings value to the table, celebrate passion, inspire the team to embrace the greater vision, and lead forward with enthusiasm. And leaders learn by listening.

Taking a cue from Alice Korngold’s thoughts on listening, I have listed seven different Page to Practice™ book summary excerpts below that feature an emphasis on the importance of active listening:

Catalytic donors view individuals as “essential participants” in the process of solving problems for themselves. Listening to stakeholders is a powerful engine for change because of the ideas that emerge and the solutions that result from brainstorming.

Understanding the differences among generations starts with listening to what each generation has to say about what shaped them. This exercises asks participants to identify important events in their past and assess their accomplishments and disappointments.

Step 1: Review Key Events for each decade (these can be found in the book, or you can add your own).

Step 2: Answer these questions for each decade:

What were your or your generation’s accomplishments?

Challenges and disappointments?

What would be helpful to share with other generations?

Step 3: Discuss these debriefing questions:

What key events and experiences that have influenced you stand out?

In what ways have they shaped how you view the world and how you approach your work?

What would be helpful for others to know to better understand you? How would you share your story?

Small actions by employees can create meaningful differences for an organization. The Gallup research shows that improving the proportion of employees with Seventh Element scores from one to five to one in three substantially impacts customer experience, productivity, employee retention and safety—all of which create, on average, a 6 percent gain in profitability. Listening to and using employee ideas have two benefits: 1) The idea itself is usually a good one; and 2) Because the idea comes directly from the employee and not management, the employee is much more likely to be committed to seeing it through. Incorporating employee ideas also helps employees feel more included.

All the nonprofits in this book have adaptive capacity—or, the ability to perceive changes in the environment and develop new approaches in response. When they perceive a gap between their vision and their results, they aren’t afraid to modify their approach to have more impact. These nonprofits have learned how to balance creative innovation and structured execution. They have mastered what the authors call “the cycle of adaptation.” Specifically, they must be able to effectively listen to the environment, experiment and innovate (either for product or process improvement), evaluate and learn what works and, finally, modify their approaches on the basis of new information.

Listen to the environment. Adaptation begins with listening for external cues in the environment and looking internally for opportunities to increase impact. Organizations that focus on working with and through other sectors of society are more adept at listening and perceiving opportunities for change.

According to Leroux Miller, no matter where you are, your nonprofit doesn’t operate in a silo; it’s essential to formalize your listening so your marketing is relevant. Listening should include in-person and online tools as well as third-party and custom research. There are online tools that allow you to observe and listen to conversations about your issue and specifically, your organization. (See Page to Practice™ section for listening strategies.)

Effective listening is critical to getting your bearings online, making sense of data, identifying network leaders and leveraging your message appropriately. Listening to large numbers of people can easily be accomplished by using tools such as Google Alerts, Technorati blog mentions, RSS readers, Twitter search, Delicious tags and Boardreader. Kanter and Fine like to think of listening through these tools “as an investment in relationships”—not time taken away from other tasks. Transitioning from listening to actively communicating with people online is the secret to engaging an audience according to the authors.

With your listening tools in play, you can begin to engage the public in the following ways:

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An interesting article was brought to my attention this morning by a tweet from one of our CausePlanet contributors, Michaela Hayes. Published by the Stanford Social Innovation Review and written by Kristi Kimball and Malka Kopell, “Letting Go” highlights a handful of ways that foundations are getting in the way of their grantees’ work. Micromanaging is just one of the ways that foundations undermine the work of their recipients, say Kimball and Kopell, who work within the foundation world.

In fact, the first problem was described as “foundation-designed solutions.” Crutchfield, Kania and Kramer discuss this problem in Do More Than Give. The Do More authors describe number four of their six best practices as “empower the people,” which explains that when foundations or donors sit shoulder to shoulder with recipients and even the communities’ served at the same table, creating social change becomes more collaborative and results-oriented rather than the give, spend and report cycle, we typically see between grantor and grantee. Crutchfield, Kania and Kramer say that catalytic donors view individuals as “essential participants” in the process of solving problems for themselves. Listening to stakeholders is a powerful engine for change because of the ideas that emerge and the solutions that result from brainstorming.

Another problem Kimball and Kopell expose from their view inside the foundation world is that funders typically make grants with “tunnel vision.” They choose one organization to make the change they are looking for in the entire system. “Instead of letting 1,000 flowers bloom, they think they can afford just one variant. But focusing narrowly on one solution is a fragile strategy, particularly in complex, unpredictable environments,” say Kimball and Kopell. Do More authors would agree by sharing best practice number three, which is “forging nonprofit peer networks.” Instead of focusing on a few grantees, donors are in a unique position to look at an issue in its entirety and call for convenings among all nonprofits who focus on the same issue to benefit from information sharing and collective impact.

Do More Than Give is an important read for many reasons. Here are two: 1) This book takes a rare and intelligent look at what the donor can do beyond selecting a good cause and 2) Each of the donor recommendations fuels your imagination to explore how you can cultivate the catalytic behavior in your followers, friends and philanthropists.

Also worthwhile in this book are the case studies of individuals, corporations and foundations—large, small, private and community—who have played a unique role in advancing a larger issue with nonprofits at the table. For those who haven’t read its predecessor, Forces for Good, you can read a summary of best practices in the book’s appendix, which essentially means two books in one. Overall, the book contains a great deal of innovative thought and approaches to working collectively with donors.

This week, I’m highlighting Crutchfield, Kania and Kramer’s best practice #2: blending profit with purpose, thanks to a recent blog post I read today at SelfishGiving.com.

According to the authors, businesses have a lot to offer as vehicles for social progress, and donors can engage business tools in three ways:

1) They can tap corporate know-how to create direct social impact: They can utilize the knowledge, skills and abilities of employees, as well as company systems and processes; intellectual property such as patents and trade secrets; and other assets. For example, GE used their industry know-how to upgrade thirty-seven clinics and hospitals and retrained local staffs in poor communities in Africa, Asia and Latin America, all without charge. GE continues to open a new clinic every month as part of its $90 million annual budget for philanthropy.

2) They can create shared values through profit-making initiatives that serve social objectives: In the GE example, senior executives saw a tremendous range of opportunities for their business. The company with a goal of reaching 100 million new patients every year. GE partners with Grameen Bank, the microfinance institution, to build a sustainable rural health model, reducing maternal and infancy mortality rates by 20 percent.

3) They can use their investment capital to further their social impact: The authors report that catalytic donors are using their vote and their cash to further social issues through “impact investments.” The authors explain a strategy called “shareholder advocacy,” where a foundation can purchase shares of stock in a company in which they wish to have policy influence. For example, the Nathan Cummings Foundation, whose interest in the environment prompted them to purchase stock in Smithfield Foods so they could file a shareholder resolution requesting complete disclosures of environmental impacts. They filed annually, eventually gaining 29 percent of the shareholders’ votes, and the company began to negotiate with the foundation. The foundation brought in their grantees for expertise, which led to the company’s commitment to track and report environmental indicators relating to its farms.

4) Even more immediate social impact can be accomplished by foundations offering low- or no-interest loans to grantees, which has been done for decades. These loans qualify as program related investments, which means foundations can count these loans as part of their payout requirements. This strategy allows foundations to “recycle” their funds because they can be used multiple times to achieve social impact. Another example of impact investing is when foundations or donors are willing to be the lead investors in a socially responsible business solution to attract other venture capitalists. Kiva is a great example—in 2010 users lent more than $100 million in microloans. The Packard Foundation similarly was the first investor to the table in their case, taking the risk and lower return in order to fund a sustainability project, which eventually attracted substantial venture capital from traditional sources.

Working through one sector alone is no longer enough to address the multifaceted social and environmental problems we face today. Because donors can do more than give, they have a critical opportunity to move on from passive donor to problem solver.

To create systemic change, nonprofits today need catalytic donors in their court to leverage the full participation of every sector in society. According to Do More Than Giveauthors Crutchfield, Kania and Kramer, the number of billionaires has tripled since 2000 and nearly half of the 75,000 private foundations established in the U.S. were created in the last decade.

We’re also seeing growth in private enterprise where new corporate entities are created to blend profit with social purpose, as well as in government’s willingness to partner in nonconventional ways. Within the context of these societal trends, there is no question that donors are positioned like never before to help orchestrate an integrated approach to problems and embrace catalytic philanthropy.

These authors have distilled the six practices of donors who change the world for readers. Nonprofit leaders will no doubt discover ways in which they can nurture best behavior in their donors with this book. As we always do in our Page to Practice™ book summaries, we interview the author and Leslie Crutchfield provided some terrific insight. Here’s one of our questions and her answer:

CausePlanet: Within the six best practices of donors who change the world, which did you find to be the least common among your donor profiles and why?

Crutchfield: This is an excellent question and one I haven’t been asked before. When speaking about Do More than Give or my previous book with Heather McLeod Grant, Forces for Good, I’m often asked which is the most important practice to focus on if you’re not doing all of them. But which one is least common? I think we’re starting to see a shift on a many of these. Practice #1: Advocate for Change is an interesting theme, because so many foundation boards shy away from funding advocacy. In my view, this is mostly because there is simply too much confusion about what is legal versus what is not–I always tell boards and trustees that each of the nonprofits in my first book, Forces for Good, were able to do all the lobbying they needed and still fall well within the legal limits–to see a shift toward advocacy. But it seems today more donors are warming up to the new idea. Practice #2: Blend Profit With Purpose is where we address activities such as mission investing. But a very small percentage of foundations actually put into practice that approach, despite the excellent report on the subject by Rockefeller Philanthropy Advisor: “Philanthropy’s Passing Gear.”

In this month’s book feature of The Nonprofit Marketing Guide, I was surprised to see author Kivi Leroux Miller devote a chapter to thanking donors, especially since those of us in the sector know how important they are. After reading the opening paragraph called, “What I got when I gave experiment,” my surprise was quickly replaced by curiosity.

In 2008, Kivi made a donation to 16 different nonprofit organizations, 12 of which she had a giving history, and what she got after giving was as she puts it, “almost nothing.” Of the 12 national charities, only four or 33 percent acknowledged the gift in any way. Of the three regional charities, only one in three acknowledged the gift. Leroux Miller reports that these results are not unusual and other similar tests have shown that less than 50 percent of donors receive thank you letters. Leroux Miller did the test again with 10 national nonprofits when going to press and you can look at her results at www.nonprofitmarketingguide.com/blog for the results.

Use a mail merge to personalize by name, gift amount and personal designation. It’s also nice to add a handwritten note if you can and tell stories about the people you serve.

Use more creative openings besides the standard “On behalf of” or “Thank you for” and instead try starting with one of your stories.

Explain how the gift will be used.

Tell them what to expect next. What will they receive or what invitation might they look for in the mail, etc.

Personalize from the sender. Use ink instead of digital printing for signatures. Add personal notes from volunteer leaders or board members. Phone calls are also a powerful follow up as well as a thank you from the person or people who benefit from the gift directly.

Here’s what Leroux Miller had to say when we asked her about thanking donors in our Page to Practice™ interview:

CausePlanet: You dedicate a chapter to the importance of thanking donors. Why do you think nonprofits fail in this area despite the fact that they know better?

Leroux Miller: It’s short-term, to-do list-driven thinking. It’s not that nonprofits are inherently rude, but they do use being busy as an excuse. And they pay for that in the long-term, when they don’t have as many donors who give the second or third gift. Thanking donors is essential to repeat giving, but building time into your schedule to do it right with timely thank-yous requires a longer-term perspective.

Join us for the final installment of our interview with Michael Edwards about his book, Small Change: Why Business Won’t Save the World. In this portion of the interview, find out where you can follow the debate about philanthrocapitalism, and learn more about Edwards’ views on collaboration versus competition.

CausePlanet: The notion of philanthrocapitalism sounds like the next new great idea at first blush—especially to those who haven’t read your book. Are there any blogs, newsletters or periodicals you would recommend that provide an ongoing, unbiased evaluation of philanthrocapitalism as it evolves?

Edwards: That’s a tough call, though I’m already beginning to see more pushback, constructive criticism and healthy debate about these questions. It’s still very difficult to be honest and open about this stuff because of a justifiable fear of offending the donors, and there’s a huge industry of advisers, consultants and bloggers who act as an echo chamber for the philanthrocapitalists and their views, often in ways that are quite divorced from the day-to-day concerns and experiences of the nonprofit community. But I would definitely recommend The Nonprofit Quarterly, for example, which does speak up and is not afraid to take up the difficult questions, and Blue Avocado. The National Committee for Responsive Philanthropy is also very good, and the Chronicle of Philanthropy publishes opinions on both sides of the debate.

CausePlanet: Everyone talks a big game about collaboration in the nonprofit sector, but many nonprofits still don’t believe that a rising tide lifts all boats despite positive examples. You support collaboration by way of addressing businesses’ misguided favor of competition among nonprofits. Can you explain?

Edwards: This is one of the most contested issues in the debate over philanthrocapitalism, and it’s partly down to language. If “competition” simply means doing one’s best for the causes one believes in, or striving to be the best that we can be, then it would be odd to argue against it. But if it means competition in the formal, business sense of building market share against other providers, often by driving prices down and profits up, then I think that’s very damaging to the nonprofit mission of securing equal rights for all. After all, you can’t have too much social justice or compassion, and securing things like that requires a rich diversity of organizations acting like an ecosystem so that the whole is more than the sum of its parts. The elements of an ecosystem co-exist in a mutually-supportive relationship, they don’t compete. Obviously, nonprofits have to secure resources in environments where they are scarce, but that doesn’t mean that competition should define the sector and its work.

Edwards: Honesty, humility, authenticity, self-criticism and an equal valuing of what each has to bring to the table. Those qualities may be absent from many current collaborations (which are very one-sided, reflecting the power imbalance and structures of privilege that run through much of philanthropy), but they determine whether enough common ground exists to make the work effective, to set it on the right road, and to monitor and address any problems that arise along the way. There’s a saying from the foreign aid world that I think is relevant here: “If you have come to help me, go home now. But if you have come because your liberation is bound up with mine, then let’s get to work.” That captures the spirit of equality and mutual learning that all successful collaborations require. But that is very demanding, because it requires openness to change—deep, personal change—on both sides.

CausePlanet: Your book makes a terrific case for nonprofits staying out of the business of market strategies to create social change. What advice would you give a nonprofit CEO who would like to disengage a business partnership but faces unanimous opposition from the board?

Michael Edwards: At the moment, market-based strategies are much in vogue, and there’s a huge amount of hype about their impact and effectiveness. Board members obviously listen to that hype and want to become involved, perhaps without delving very deeply into the costs and benefits of these strategies. So I understand the question that you’re raising. I think the way to approach this question is NOT through blanket opposition, which just seems defensive, but through a principled and pragmatic analysis of the nonprofit’s mission and how best to promote it in a rapidly-changing world. There is already plenty of evidence that shows how a mission for social change can be damaged by the adoption of market-based strategies, but often nonprofits don’t know about it, or don’t mobilize it in and for their work. Board members aren’t stupid, so if they see that something isn’t working for their organization and others like it, they are usually open to discussing why that is.

CausePlanet: The allure of a large gift from a philanthrocapitalist is very powerful for a nonprofit organization—especially because their methodology makes sense in the corporate world. What questions should nonprofit leaders ask of themselves or the philanthrocapitalist to determine if the collaboration is appropriate?

Michael Edwards: Money always has a “steering effect” on the organizations that receive it, especially if it comes with strings attached, and those strings are often quite tightly-wound by “philanthrocapitalists” because they believe that close guidance is essential for success. After all, that’s a basic lesson of venture capital investing and supply chain management, even though it’s incompatible with the freedom and flexibility that nonprofits need to respond effectively on the ground. So, nonprofit leaders should ask themselves what trade-offs are acceptable in each situation, and how far they are prepared to go in making compromises in order to unlock these new resources. Sometimes these trade-offs will be manageable through careful negotiation with the donor, but at other times the best option may be to forgo the gift entirely. That’s a tough choice in today’s economic climate, but growth isn’t always the best path to impact.

CausePlanet: In chapter four you identify only two ways that businesses should safely collaborate with nonprofts: 1) delivering social and environmental services; and 2) strengthening the financial management of nonprofit organizations. Are there any potential pitfalls nonprofit leaders should try to anticipate with these recommended channels?

Michael Edwards: I think that depends on the mission of each nonprofit. A community organizing or campaigning group, for example, may need little of either of these two things, though no doubt we could all benefit from stronger financial management. Over the last ten years, nonprofits have been pushed further and further towards service-provision as their core mission, and away from the social and political work of civil society. I think that’s a real problem, because it’s that social and political work that creates the biggest impact over the long term (think of the Civil Rights movement, for example, or the mass membership groups that pushed the federal government to pass landmark social legislation after World War II). So, I want nonprofits to recover that part of their mission at every opportunity. If a focus on service-provision or market-based revenue generation pushes them away from doing that, I’m against it, but if the two can be successfully combined, that’s good. So, a pragmatic way of approaching these questions is to ask how nonprofits can increase the social and political impact of their service-providing and revenue-generating activities. There’s already some good work on that question from the Building Movement Project at Demos in New York and others elsewhere.

Michael Edwards’ book, Small Change: Why Business Won’t Save the World is an essential read for any nonprofit that’s engaging businesses with their mission. Edwards’ surprising look at the realities of partnering with philanthrocapitalists will prepare you to closely examine the strings attached to your next big corporate gift. Below you’ll find a compelling excerpt from our Page to Practice interview.

CausePlanet: Some say that blending capitalism and philanthropy is the best of both worlds, and you make many effective arguments against this philosophy in your book. What is the foremost reason, in your mind, for not blending the two worlds?

Edwards: You wouldn’t use a typewriter to plough a field or a tractor to write a book, so why use business and the market where they have no comparative advantage, in the complex world of social and political change? Capitalism and philanthropy (or civil society more broadly) are different instruments that are designed to answer different questions—both necessary and valuable, but different. I fear that by blending them together, we may weaken the ability of civil society to transform capitalism over the long haul. That doesn’t mean that these two worlds should continue in splendid isolation from one another, but real change will come when business acts more like civil society and not the other way around. Business should fix itself instead of meddling with others. The social impact would be enormous.

CausePlanet: Why do you think businesses do not respect or observe the comparative advantage nonprofits have with bringing about social change?

Edwards: The explosion of social responsibility in the business world over the last ten years is a historic development, but we haven’t thought hard enough about the costs and benefits of different ways of putting it into practice. People may believe that they can transfer the lessons that made them successful in the business world into the nonprofit world, especially when they see nonprofits as less efficient and effective than businesses, which is a common view. This is understandable, but deeply misguided. I think if business people spent more time on the frontlines of social change and experienced how nonprofits actually work in reality (often very well, and on a shoestring), they might develop a more nuanced view and a greater sense of humility. And as we know,”humility is the threshold of insight.”

CausePlanet: In your opinion, what about nonprofits seems to inspire the savior complex in philanthrocapitalists when the corporate sector has plenty of its own issues with the bottom line?

Edwards: I think it is much easier to focus on the problems of other people or institutions than your own! After all, this is a common human trait which can be found in the nonprofit world as well. That’s why corporate philanthropy is sometimes used as a smokescreen for socially-irresponsible practices. Correcting those practices means corporations paying their fair share of taxes, removing their lobbyists from politics, obeying regulations in the public interest, breaking up monopolies, supporting public health care and education, and creating better-paying jobs with more benefits. And all those things require pretty fundamental changes at the heart of business itself. I think that challenge is daunting, so there’s a natural tendency to eschew the obvious path to social impact and focus on philanthropy instead.

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CausePlanet is pleased to feature a terrific book this month that will have you rethinking how to partner with businesses and philanthropists: Small Change: Why Business Won’t Save the World. Michael Edwards provides a refreshing and surprising look at the widely accepted but unproven success of philanthrocapitalism.

Edwards argues that the hype surrounding partnerships with businesses and philanthrocapitalists far exceeds the reality of outcomes when systemic change is involved. While there is “justifiable excitement” about the potential for progress in major global issues such as health, agriculture and access to microcredit, the reality is that no delivery of goods and services can eliminate inequities surrounding poverty and violence, for example—only the empowerment of those closest to the problem, as well as transformation of systems, values and key relationships can create meaningful change.

Because no nonprofit wants to appear unthankful for the generous opportunities that come their way, the rising debate about philanthrocapitalism’s shortfalls have hovered under the radar. Edwards’ book asks the tough questions and compels readers to examine the messy yet transformational nonprofit work in society versus the sometimes inappropriate reduction of societal problems to a bottom line.